A Closer Look at Trends at Equinix

Equinix reported its third quarter results last week. In our previous earnings roundup, we've already gone through the main numbers disclosed by the company. However, now that Equinix has also filed its 10Q, we believe it might be interesting to look at some metrics from a different angle.

As we did with our Earnings Preview, we'll supply, at the end of this blog post, an interactive spreadsheet resuming the main metrics discussed in the article. You can also download the spreadsheet at this link for your own modeling.

Revenues for Q3 came at $330.3 million, the high end of the range given earlier in the month when Equinix issued a revenue warning. The company also guided for about $342 million (midpoint) in Q4, for forecasted growth of 3.5 percent quarter-to-quarter.

Impact of Switch and Data Acquisition

Adjusted EBITDA was $146.5 million, representing a margin of 44 percent on revenues, about three points better than Equinix's own expectations. As we noted in the past, the acquisition of Switch and Data has negatively impacted Equinix's Adjusted EBITDA, as the merged company was achieving a much lower percentage (more than 10 margin points). That's a metric that Equinix is looking forward to improving and bringing to its own standard through synergies and scale.

In Q4, however, Equinix expects adjusted EBITDA to remain flat, which would represent a further decline in percentage, probably to about 43 percent. We highlighted Equinix's Adjusted EBITDA trend, in percentage on revenues, in our third quarter sheet.

The Switch and Data acquisition certainly represented a disappointment as far as revenues are concerned. Equinix emphasizes that it is ahead of schedule in achieving cost reductions due to the synergies possible between the companies. Nonetheless, Switch and Data achieved revenues of $56.7 million in Q1, and is now delivering a modest increase to $57.5 million in Q3, after growing about 20 percent in 2009.

If we look at organic growth at Equinix, excluding any impact from the Switch & Data operations, we see that overall growth for Equinix is slowing down a bit. While Equinix was achieving a 27 percent year-to-year growth rate in Q4 2009, the rate has steadily declined to 20 percent in Q3 2010 and could go below this number in Q4. On a US base only, the 10Q is disclosing that Equinix is growing already at a 16 percent year-to-year rate organically.

Strong Growth in Europe, Asia

These numbers give us the opportunity for a few observations: first of all, the North American market seems to be growing at a slightly slower pace, while Asia Pacific and Europe are both growing at a 7 percent quarter-to-quarter rate on a constant currency base. That also explains why Equinix spent about 50 percent of its Capex in the quarter in these two areas ($68 million of about $144 million spent in total Capex – both Expansion and Ongoing).

On the capacity front, Equinix struggled last year due to capacity limitations in the USA, with an average of 5,200 cabinets available in spite of several new centers coming on line, hardly sufficient to balance customer demand. But Switch and Data's inventory is almost doubling Equinix's potential.

As we show in our last sheet, we expect the company to exit 2010 with about 13,000 cabinets available (USA and Canada). While it is always necessary to go on a market by market analysis, this single number (and the expected slower growth in the North American Market) might very well explain why Equinix doesn't feel the need to add much capacity, and issued guidance for about $300 million in Expansion Capex for 2011, or roughly 9,000 additional cabinets. It's much less than what Equinix spent in 2010, but there is no doubt that part of the cost of the Switch and Data acquisition went against “buying capacity” in the North American market.

Positive Outlook for 2011

The positive outlook for 2011, with revenues expected to be greater than $1.5 billion for the year, was generally well accepted by analysts and investors.

Equinix could finally be free cash flow positive for the year, as the company might be able to generate all the cash necessary to support its forecasted growth – an inflection point which could materialize sooner than expected and avoid Equinix tapping the capital market to finance its expansion needs.

In a few days, Equinix will be having its analyst day where the company will discuss, in more depth, targets and programs for 2011. As a last side note, Equinix will also be moving its headquarters to Redwood City in November.

Paolo Gorgo writes about the colocation and CDN sector at Nortia Research and Seeking Alpha.